Checking Out of California?

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We can all agree, California’s current fiscal situation is at a critical point and our elected officials have the unenviable position of trying to remedy the situation. However, the New York state-style “affiliate nexus tax” being put forward as a part of a solution to fill some of the void in California’s budget is just plain wrong. It’s well intentioned, but it won’t work. It will be a devastating blow to California’s small businesses and further damage the overall economy.

Here’s an example of how it would work: a Santa Monica-based website shows banner ads for Overstock.com, which is headquartered in Cottonwood Heights, Utah. With the affiliate nexus tax in place, Overstock would be classified as a California-based business because of the fact that the Santa Monica website showed the ads and got paid for it. Overstock would then be required to collect sales tax on all sales into California and forward that money to the state. The idea behind the proposal is that California could force out-of-state retailers to collect and pay California sales taxes.

Sounds pretty reasonable on paper, but the reality is that a large number of those retailers will simply refuse to advertise with California’s small online businesses due to the tax they would incur. This is exactly what happened in New York state when it passed the same law in 2008: Roughly 200 retailers stopped advertising on New York state-based websites that were impacted by the legislation. I’ve spoken to these retailers and they have assured me they would no longer work with me, or any California business, if this tax passes in California.

I’m the chief executive of Savings.com in Santa Monica. We get all the best deals from our merchant partners, and provide savvy shoppers with coupons and deals to thousands of online stores. We have more than 3 million unique visitors a month and have been in business three years. I have 80 employees and openings for 20 additional employees this year, but I am in a quandary. If this affiliate nexus tax is implemented as a part of California’s budget, then I will lose about 20 percent of our company’s revenue overnight. Not only will I not bring in any new hires, I will be put in the position of letting go approximately 25 percent of my current work force and I will struggle to compete with my competitors that are in other states (who don’t have this unfair tax situation).

Simple math

The math is very simple: If our revenue goes down by that much, then we lose employees, who won’t be paying income tax. The less money Savings.com makes, the less business income tax we pay. And California consumers will get their deals and coupons from my competitors in other states. The affiliate nexus tax, in fact, takes business away from California.

In addition to these short-term revenue losses to the state, there is a long-term cost that will have an even larger impact on the state’s budget. California is the leading state in the Internet technology sector, with Internet hubs like Los Angeles, San Francisco, San Diego and Santa Barbara. Internet businesses will be faced with the tough decision of where to establish their business. Would it be better to choose California, where the affiliate nexus tax prohibits you from working with 20 percent of the retailers that refuse to work with California websites, or would it be better to establish your business in another state that doesn’t employ these unfair tax practices? The end result will likely be an out-of-state migration of one of the largest and fastest growing sectors of the California economy – the Internet.

The California affiliate nexus tax is being misrepresented as a way to help our fiscal situation, when the truth is it is a blatant attempt to create an illogical excuse to go after out-of-state retailers, at the expense of California small-business owners such as myself. This will have significant unintended consequences, cost Californians their jobs, result in higher unemployment, lower income tax proceeds and it will create a large incentive for Internet companies to establish their business in virtually any other state except California.

Loren Bendele is chief executive of Savings.com in Santa Monica.

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